Ind Accounting Standard is on par with the International Financial Reporting Standard (IFRS) 9, under which banks are required to undertake early recognition of provision for losses on loans and off-balance sheet exposures based on an expected credit loss (ECL) model. Mumbai: The Reserve Bank of India could push the implementation of Ind-AS — the Indian version of global accounting standards — to fiscal 2023, seeing poor preparedness of banks to make the transition. The new rules are expected to add to the burden of higher capital requirement for banks, especially loanloss provisions.

It is estimated that PSU banks would require an additional ₹1.1 lakh crore to immediately adhere to the accounting rules if implemented.

“Balance sheets of Indian banks, especially public sector ones, are not robust to deal with the impact of implementation of the new accounting norms,” said PwC partner and financial risk & regulation leader Kuntal Sur.

“Also, the proposed merger of public sector banks is expected to create more complications on the calculations of expected loss accounting, so it’s practical if this implementation is pushed for a few years.”

While the RBI conducted an impact assessment on the implementation of Ind-AS in 2016, banks already submit parallel accounting based on the new system. In March 2019, the RBI announced deferral of IndAS till further notice.

The RBI did not respond to ET’s queries.

Ind Accounting Standard is on par with the International Financial Reporting Standard (IFRS) 9, under which banks are required to undertake early recognition of provision for losses on loans and off-balance sheet exposures based on an expected credit loss (ECL) model. Currently, Indian banks follow the Generally Accepted Accounting Principles (GAAP), which requires banks to recognise mark-tomarket losses.

Ind-AS is expected to increase transparency and comparability of the financial statements of Indian banks with their global counterparts.

RBI may Push Back New Accounting Norms

It will also impact key function areas like regulatory reporting and capital adequacy ratios. Globally, banks have adopted the new accounting standards in 2018 and saw a slight uptick in their loan loss provisions.

"The IFRS 9 moves away from the incurred credit loss model to expected credit loss model, which would mean that the timing of recognition of loss could be preponed. Due to this, the provisioning have to be increased and could in turn impact the capital adequacy ratio," said Sandip Khetan, partner, EY India.

The incurred credit loss model used by the banks is based on RBI guidelines where it considers by how many days the loan is delayed before classifying it as a stressed asset. On the other hand, under the new model, banks would be expected to factor in economic cycles and whether there is a potential bubble while arriving at the health of a loan under the expected credit loss model. This would mean that banks would have to calculate probability of a loan getting bad, before there are any indication of it going bad.

Last year, the government announced the merger of 10 public sector banks to create four big banks, but is yet to notify this move. This proposed merger is expected to further add to banks’ capital requirements, but the government tap is shut for now.

Over the last five years the government has infused nearly Rs 3.5 lakh crore into public sector banks, but the return to its largest shareholder has been negative. In the latest Union budget, the finance minister did not announce any capital infusion for stateowned banks as it front loaded Rs 68,855 crore, out of Rs 70,000 crore earmarked for capital infusion for the current fiscal, to take care of the mega-merger plan announced in August 2019.

Indian banks are sitting on a bad loan pile of Rs 9.5 lakh crore which is likely to rise further. And if IFRS is implemented, high incremental provisioning requirement will result in higher capital necessity and banks’ capital buffers will dwindle.

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